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Process and Product Innovation: Complementarity in a Vertically Differentiated Monopoly with Discrete Consumer Types

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  • Swapnendu Bandyopadhyay
  • Rajat Acharyya

Abstract

This paper examines the complementarity between process and product innovation where process innovation reduces the marginal cost of quality. In the context of a vertically differentiated monopolistic market with discrete consumer types, we investigate how the nature of (fixed versus variable) innovation costs and the distribution of consumers over different types affect the complementarity between process and product innovation. We show that under variable innovation costs a process innovation is more likely to occur alone than both innovations together when taste diversity (or consumer heterogeneity) is not significant and/or when there are more low‐type than high‐type consumers.

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  • Swapnendu Bandyopadhyay & Rajat Acharyya, 2004. "Process and Product Innovation: Complementarity in a Vertically Differentiated Monopoly with Discrete Consumer Types," The Japanese Economic Review, Japanese Economic Association, vol. 55(2), pages 175-200, June.
  • Handle: RePEc:bla:jecrev:v:55:y:2004:i:2:p:175-200
    DOI: 10.1111/j.1468-5876.2004.00301.x
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    Cited by:

    1. Rajat Acharyya & Prabal Roy Chowdhury, 2006. "Innovation incentives in an intergrated marketed with vertical product differentiation," Discussion Papers 06-02, Indian Statistical Institute, Delhi.
    2. Hans Sebastian Heese & Jayashankar M. Swaminathan, 2006. "Product Line Design with Component Commonality and Cost-Reduction Effort," Manufacturing & Service Operations Management, INFORMS, vol. 8(2), pages 206-219, May.
    3. Acharyya, Rajat & Banerjee, Swapnendu, 2012. "On tariff and quality innovation in a market with discrete preferences," Economic Modelling, Elsevier, vol. 29(3), pages 917-925.
    4. Jason M. Walter & Jeffrey M. Peterson, 2017. "Strategic R&D and the innovation of products: understanding the role of time preferences and product differentiation," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 26(7), pages 575-595, October.
    5. Saha, Souresh, 2014. "Firm's objective function and product and process R&D," Economic Modelling, Elsevier, vol. 36(C), pages 484-494.
    6. Maria Rosa Battaggion & Piero Tedeschi, 2021. "How do demand and costs affect the nature of innovation?," Journal of Economics, Springer, vol. 133(3), pages 199-238, August.
    7. Rajat Acharyya, 2005. "Consumer Targeting Under Quality Competition In A Liberalized Vertically Differentiated Market," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 30(1), pages 129-150, June.
    8. Maria Rosa Battaggion & Piero Tedeschi, 2006. "Do Process Innovations Induce Product Ones?," Working Papers (-2012) 0601, University of Bergamo, Department of Economics.
    9. Maria Rosa Battaggion & Piero Tedeschi, 2006. "Do Process Innovations Induce Product Ones?," Working Papers (-2012) 0601, University of Bergamo, Department of Economics.

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